Daily Commentary by Larry Baer 1.31.2012

Daily Commentary by Larry Baer: Boring -- very boring.  Mortgage interest rates are struggling to maintain their momentum toward new historical lows. 

Signs of continuing progress in talks to avert a Greek debt default are taking the edge off of the global investment community's appetite for safe-haven investments like U.S. dollar-denominated government debt obligations and mortgage-backed securities.  If the current trickle of capital flowing out of the safe harbor of dollar-denominated assets were to turn into a flood -- one of the key supports holding mortgage interest rates at current levels will be washed away.  This is a process that will evolve over time and currently is not much of a near-term threat, but I think it would be wise to view it as an inevitability -- rather than a possibility.   I will continue to keep you posted on this developing story. 

In terms of the economic news of the day mortgage investors gave this morning's report of in-line 4^th Quarter Employment Cost growth of 0.4% and a January survey of consumer confidence indicating people's attitudes on Main Street have become more gloomy than any time in the previous two months -- nothing more than a passing glance. 

THE MARKET IS ALWAYS RIGHT! . YOU AND I ARE SOME OF THE TIME

Daily Commentary by Larry Baer 1.30.2012

Daily Commentary by Larry Baer: New day -- same old story. 

Euro-zone finance officials are continuing to voice optimism this morning that a deal to avert a Greek debt default is imminent.  The rumor mill is buzzing with chatter that an agreement between the Greek government and its private creditors will be complete within days. 

The "so what" factor here is pretty straightforward.

Massive amounts of capital have fled the multi-year crisis in the euro-zone and have poured into safe-haven assets like U.S. dollar-denominated Treasury debt obligations and mortgage-backed securities.  The good news part of the story is all this capital has helped push mortgage interest rates here at home to historical lows.  The bad news part of the story is once the financial threat begins to diminish in Europe -- capital parked in safe haven investments will likely begin to look for higher yielding opportunities elsewhere.  Once the process starts one of the significant supports behind the move to record low mortgage interest rates here in the U.S. will slowly begin to fade.  I will continue to keep you posted on this developing story. 

The Commerce Department released the December personal income and spending figures earlier this morning and the news was good for the prospects of steady to perhaps fractionally lower mortgage interest rates -- and not so good for the prospects of further economic growth.  Consumer spending was flat in December as households took advantage of the largest rise in income in nine months to boost their savings at the expense of retailers.  It was the weakest reading on spending since June.  For the time being at least, consumers appear to have rediscovered the notion that a penny saved is a penny earned.  Consumer spending drives more than 70% of all domestic activity, so this new penny-pinching attitude on the part of consumers could certainly set the tone for slower economic growth in the coming months.  Salaries and wages posted a 5% gain last month marking the largest improvement in this measure since March.  The report showed that inflation pressures were generally contained with the core rate of the personal expenditure and consumption index inching up a very modest 0.2% in December.

THE MARKET IS ALWAYS RIGHT! . YOU AND I ARE SOME OF THE TIME

Daily Commentary by Larry Baer 1.27.2012

Daily Commentary by Larry Baer: Euro-zone finance officials are voicing optimism this morning that a deal to avert a Greek debt default is imminent.  The rumor mill is buzzing with chatter that an agreement between the Greek government and its private creditors will be complete within days.  The "so what" factor here is pretty straightforward.  Massive amounts of capital have fled the multi-year crisis in the euro-zone and have poured into safe-haven assets like U.S. dollar-denominated Treasury debt obligations and mortgage-backed securities.  The good news part of the story is all this capital has helped push mortgage interest rates here at home to historical lows.  The bad news part of the story is once the financial threat begins to diminish in Europe -- capital parked in safe haven investments will likely begin to look for higher yielding opportunities elsewhere.  Once the process starts one of the significant supports behind the move to record low mortgage interest rates here in the U.S. will slowly begin to fade.  I will continue to keep you posted on this developing story. 

According to Commerce Department statisticians, the US economy grew at its fastest pace in 1 1/2 years in the fourth quarter of 2011.  Fourth-quarter gross domestic product, a measure of the value of all goods and services produced within the country, grew at a 2.8% annual rate.  The growth marked a sharp acceleration from the previous three months pace and it was the quickest since the second quarter of 2010.  Mortgage investors largely shrugged this report off since most of the big jump in growth was due to inventory accumulation.  Most economists expect companies to cut back on inventories in the first three months of 2012.  If this assessment proves accurate, overall economic growth in the first three months of 2012 will likely slow noticeably and upward pressures on mortgage interest rates will remain modest.

Looking ahead to the coming week -- Monday's Personal Income and Spending Figures for December together with Wednesday's Institute of Supply Management's Manufacturing Index will be the warm-up act before January Nonfarm Payroll figures take center stage on Friday morning.  There is a growing chance that one or any combination of these reports may prove stronger than the market now expects.  If so, the surprise has potential to put some upside pressure on the current level of mortgage interest rates.  It has been my experience that one of the easiest ways to make money in this business -- is not to lose it to start with.  Be very attentive to your pipeline risk management strategies over the next five business days. 

THE MARKET IS ALWAYS RIGHT! . YOU AND I ARE SOME OF THE TIME

Daily Commentary by Larry Baer 1.26.2012

Daily Commentary by Larry Baer:  Mortgage investors are responding to news this morning that indicates new orders for U.S. manufactured goods rose in December, while a gauge of the number of Americans standing in line to file first-time government jobless benefits claims rose last week. 

New orders for goods ranging from toasters to airplanes rose 3% last month.  Excluding transportation, new orders rose 2.1%.  Though these figures surprised to the upside, the last month of the quarter often results in stronger than expected growth in both orders and shipments.  Most mortgage investors are aware of this tendency and chose to shrug the report off as nothing more than a seasonal anomaly.

As expected, initial jobless claims rose in the latest week, reversing part of the prior week's unexpected decline.  The usefulness of this data in gauging labor market conditions continues to be significantly diminished because of holiday related volatility.  Mortgage investors gave this data nothing more than a passing glance this morning.

Sales of new homes unexpectedly declined in December for the first time in four months, capping the slowest year on record for builders.  The supply of homes at the current sales rate increased to 6.1 months worth from 6.0 months in November.  There were 157,000 new homes on the market at the end of December, the fewest on record.

The lion's share of this morning's rally in the mortgage market is being created by investors' sense it will not take much of a disappointment in terms of economic growth to get Fed Chairman Bernanke and the other members of the Federal Open Market Committee motivated enough to launch another round of quantitative easing.  Most observers believe the Fed will focus on acquiring up to $500 billion worth of additional mortgage-backed securities should they choose to deploy another round of stimulus to help the staggering economy regain its footing.  The jury is still out on this one -- but if such a program became a reality -- it is almost a virtual certainty mortgage interest rates will move fractionally lower.  Since mortgage investors live in the future - not the present -- today's rally is largely a reflection of investors moving to preliminarily price-in a future quantitative easing move from the Fed.  From a timing perspective don't look for much to develop here until March or later.  I will keep you posted.

THE MARKET IS ALWAYS RIGHT! . YOU AND I ARE SOME OF THE TIME

Daily Commentary by Larry Baer 1.25.2012

Daily Commentary by Larry Baer:  Worries about the likely outcome of the ongoing Greek debt swap negotiations together with a sense of caution ahead of the conclusion of the Federal Open market Committee meeting later this afternoon is combining to support the prospects for steady mortgage interest rates in early trading. 

For the first time ever, the FOMC post-meeting statement will include committee members' forecasts for the level on the Fed's short-term benchmark interest rates in the future.  The Federal open market committee will probably reveal that it does not expect to begin raising benchmark interest rates until at least 2014.  If the Fed is convincing enough with its justifications for keeping interest rates low for an extended period of time -- there is a chance mortgage interest rates could edge fractionally lower during the second half of the day as investors move to price-in the new information.  Since mortgage investors are not sure what to expect -- they will approach today's event cautiously.  The Fed will release their post meeting statement at12:30 p.m. ET and I'll provide you with an overview of any meaningful changes contained in the document as soon as possible after its release.

To accommodate the Fed's schedule, the Treasury Department has moved the conclusion of its $35 billion 5-year note auction from its normal 1:00 p.m. ET time slot this afternoon to 11:30 a.m.  ET.  The shift in schedule may result in weaker than normal demand from bidders at today's auction since many buyers may choose to wait to review the Fed's post-meeting statement before committing additional capital to the credit markets today.  If so, it may be difficult for mortgage interest rates to gain significant traction to lower levels in this morning's early going.

THE MARKET IS ALWAYS RIGHT! . YOU AND I ARE SOME OF THE TIME